23 March 2008

I met with my tax guy the other day. I'm tragically a victim of my own success; this year I will pay enough in taxes to fill the tanks of an F/A-18 with enough Jet-A fuel for a single mission. (And yet the damn Navy won't let me ride along! It's only fair -- I paid for the gas, I should get to ride back seat.) So we go through the whole rigamarole, determining which exclusions and deductions are reasonable and lawful and which are not.

While doing so, I cast my mind back a month or so to a blog post by Edwin Leap, in which he opined that "if we [elect] a Democratic president, that president, he or she, will surely raise taxes. I explained that I was really unhappy with that idea, and that I like the current tax cuts." Well, I can't entirely disagree; I too like low taxes, and my taxes, as a fraction of my overall income, are the lowest they have ever been.

Edwin runs in a different direction with his thoughtful post, and I refer you to read it for yourself. He touches on what most of us would consider a reasonable area of discussion -- whether government should be large or small and how far the scope of government should extend into the private sphere. There's a lot of vibrant debate taking place on these topics at both the national and local levels, and there are valid points on both sides.

What bothers me about the government's policies of the last seven years, and the virulent strain of conservatism, commonly described as "anti-tax activism," is that it conveniently ignores the reality that, once the government we are debating actually exists, once the money is spent, whether for good or for ill, that government must be paid for. "Anti-tax" is not a valid governing philosophy. "Small government" is a valid philosophy, though I don't particularly subscribe to it, but whether the government is big or small, it has to be paid for. The only way to pay for the government is taxes. Taxes today are unpleasant. Deficit spending inevitably results in higher taxes, with compounded interest, to be paid in the future, by us and by our children.

And this is what I find the most reprehensible about the Bush government's policies: they have expended federal entitlements enormously, quadrupled earmarks and pork-barrel spending, and engaged in a very expensive war, while pretending that it simply does not need to be paid for. You probably know that I, like almost two-thirds of Americans, think going into Iraq was misguided. The most recent estimates I have seen indicate that the direct costs of the war exceed $500 Billion. Even though I opposed and oppose the war, I do acknowledge that it has got to be paid for! But not the republicans.

Dick Cheney famously growled that "deficits don't matter. Reagan proved that." Perhaps, in the narrow sense that an administration can max out the national charge card without paying an electoral price; Bush's re-election seems to have confirmed this tenet. But do deficits really matter? Is the dollar's recent collapse in some part related to the national debt? What other real world consequences are there to this debt? There are a lot of really smart economists out there who debate this passionately and in terrible, mind-numbing, boring detail; I'm humble enough to admit that I don't have any claim to expertise or authority in this field. But the common-sense conclusion is inescapable: large structural deficits, escalating over time, are unsustainable in the long term.

In addition to the economic risk of a national debt that exceeds 40% of GDP, there are strategic risks. China's central bank owns about $1.3 Trillion in US Treasury notes, and has threatened to liquidate these, should the US try to impose any sanctions. I don't know about you, but I find it very unsettling that a not-exactly-friendly power like China has, should it choose, the ability to devastate our economy and trigger a collapse in the value of the dollar.

In response to this point, Edwin wondered if we couldn't balance the budget just by cutting spending. Unfortunately, about $2.1 Trillion of the $2.9 Trillion budget is off the table -- national defense, social security, interest on the existing debt, medicare, etc. There doesn't seem to be room in the remaining budget for cuts to offset the $500 Billion-ish annual deficit. Bush has been content to run out the clock on this fiscal catastrophe. McCain disingenuously promises more tax cuts. The Democrats, mindful of Walter Mondale's fate, studiously say nothing.

I think Edwin is right: if we elect a Democrat, taxes will go up. I'm not jazzed about that. On the other hand, I went through some pain to pay off my credit cards and I am glad I did. Now I've got more discretionary income to play with. Bill Clinton stared down the republican congress, raised taxes, and balanced the budget. It can be done, though with some pain. It's necessary -- if any politician has the stones and the maturity to do it. If we put it off, we just hasten the day of reckoning.

Bill Clinton bequeathed to Bush and America a budget that was balanced and solvent. Bush and his enablers in the Republican congress squandered that. I'd be pretty pissed, if I were Clinton, since the balanced budget was his most tangible and important legacy. Of all Bush's many crimes against the American people and the Constitution, his recklessness and irresponsibility with the nation's future may not be the worst, but may ultimately prove to be the most intractable.

The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, lest Rome become bankrupt.Marcus Tulls Cicero, 63 BC

14 comments:

Well written Shadowfax. It is a tough line between how much government is too much and certainly it is frustrating to see so much waste in government. Maybe there should be a tax on the voters who elect a fiscally irresponsible government. If you voted for the current administration not only do you not get your 'economic stimulus' money but you have to give some money back.

Regardless of their noisemaking, China would never sell-off all of their Treasury bonds at once...their nominal GDP in 2007 was around $7 billion. They'd never take the substantial loss required to temporarily devalue the dollar.

(And it would just be temporary)

There's a good clip of Milton Friedman explaining this on YouTube, but I don't have a link right now.

Hear, hear. You do the crime, you do the time. More than that, it's the only responsible thing to do. You're right about the US being in China's pocket and we'll eventually pay for it. Already we've been asked to turn a blind eye to their human rights abuses.

Mark's tails: I absolutely agree that there is too much waste. It's frustrating to pay taxes and see it spent so carelessly. I think the worth of a tax dollar has dropped a lot further than the worth of a dollar in my pocket. Also, I get the joke but, hey, that's the system. Whoever gets elected is Your Representative whether you like it or not and today's political climate already suffers too much from an Us vs. Them mentality.

I agree that it's exceedingly unlikely that China would carry through on their threat. It would be almost as damaging to their economy as ours (as $1.3 trillion of their currency reserves became worthless). That the logic of mutually assured destruction is our only protection against such a move is slim comfort.

Social Security, Medicaid, and Medicare shouldn't necessarily be "off the table." Raising the qualifying ages for full benefits of both SS and Medicare would prevent (or at least reduce) the need for tax increases.

I'd even concede that national defense shouldn't be immune from consideration, although my preferences would be to focus on the "entitlements" instead.

Sutton's law applies here, just as it applies to why we tax the "rich" more instead of taxing everyone equally.

I don't entirely disagree, but bear in mind that Medicare and medicaid are already underfunded, with reimbursements scheduled to decline precipitously. If you further cut them, they really will cease to exist as going concerns. The Grover Norquists of the world would view that as "a feature, not a bug," but I submit that it would be a bad thing -- bad for you & me, bad for patients, and bad for the society in general.

Social Security is the only program that is currently completely funded, so I don't see a role for reducing its benefits now in dealing with the current deficit. Granted, there are longer-term concerns which probably will require adjustments in premiums or benefit level, but that's not really germane to the year-to-year deficit question.

Truth be told, we're in a hole for which there is no way out other than a revenue-side solution. Cuts would mitigate the need, which would be fine. There's no "good" solution, politically -- either reduce benefits or raise taxes or ignore the situation. All three options kinda suck.

Bill Clinton bequeathed to Bush and America a budget that was balanced and solvent.

Sorry, Shadowfax. Wrong again. The Clinton administration bequeathed an economy that had been heading South since the middle of 2000. That’s why we got a recession in March of 2001, two months after Bush took office. Surely, even you can’t believe that the evil neocons destroyed the economy in 60 days.

And Dick Cheney is right. From the perspective of economics, the deficit is meaningless. It’s not like charge card debt. As to the Cicero quote, if you’ll take the time to study Roman history, you will discover that he was full of BS (probably why Marc Antony cut his tongue out and literally nailed it to the wall).

The 300-year period following that speech produced the highest standard of living ever known in the West---a standard that was not equaled until the 20th century. And Rome’s fall (500 years after the speech) had nothing to do with deficits.

Of the many 'disagreements' I have with your post, one of the easiest ones I'd like to point out is that Bill Clinton didn't "balance the budget" or "leave us a surplus".

Federal Government debt has gone up every single year during the Clinton Presidency. If the gummint was taking in more money than it spent (hence the claim that the budget was balanced/surplus) - how does it explain the debt going up?

I mean, it didn't even remain "steady" - it kept going up.

Truth is Bill raided the trust funds - just like everyone else has. SS is bankrupt - it's just filled with a bunch of IOUs.

I agree with the tax cuts - after all, that's MY money... earned through my sweat and labor. However, I also agree that deficit spending is stupid.

I never really agreed with the Bush administrations expansion of government, while at the same time making no effort to cut spending. I think both of these policies were not conservative in the slightest.

I would disagree with you only in your assertion that the only way to afford a larger government is to raise taxes. While tax increases generate more money in the short term, tax cuts generate more money for the government in the long term.

Shadowfax

About me: I am an ER physician and administrator living in the Pacific Northwest. I live with my wife and four kids. Various other interests include Shorin-ryu karate, general aviation, Irish music, Apple computers, and progressive politics. My kids do their best to ensure that I have little time to pursue these hobbies.

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